26 July 2007

TDW: Review of June Income Statement

We have analyzed Tidewater's (TDW) preliminary financial results for the quarter that ended on 30 June 2007. Tidewater published an Income Statement and supplemental information (e.g., vessel utilization and delivery rates) for the quarter, but they didn't provide a Balance Sheet or a Cash Flow Statement. With this paucity of data, we are not able to update the gauge scores. New scores will be computed after the company submits a 10-Q report to the SEC.

Tidewater owns a large fleet of vessels serving the global offshore energy industry. Once focused on the Gulf of Mexico, international operations comprised almost 80 percent of Tidewater's business in fiscal 2007.

With energy prices high, as they are now, offshore production becomes increasingly profitable. The demand for maritime services has gone up correspondingly, along with the leasing rates that Tidewater charges for its vessels. If changing economic conditions cause energy demand to soften and production to slow, rates will obviously decline and some vessels might have to be idled. Because each area has its own unique challenges, which change over time, production rises and falls in these areas. Since Tidewater's assets are mobile, the company can respond by shifting vessels to the regions where activity is greatest and leasing rates are highest.

Revenue started to surge at Tidewater in late 2004, after a couple years of flat (or declining) performance. The growth peak was in June 2006, when quarterly revenues were 40 percent greater than the year-earlier period. The pace of growth has already started to slow, which is natural given that the earlier increases were built on a much smaller base. Also, there are practical ceilings on how fast new ships can be deployed, how much lease rates can rise, and how close the utilization rate can get to 100 percent.

When we analyzed Tidewater after the March quarter, the Overall score was a very good 61 points. Of the four individual gauges that fed into this composite result, Growth was the strongest at 23 points. Profitability was weakest at 13 points. [Note that recent algorithm tweaks led to minor changes in the previously reported scores.]

Let's compare the latest quarterly Income Statement to our previously announced expectations.


June 2007
June 2007
June 2006
Op expenses

CGS (1) (150)

Depreciation (28)

SG&A (32)

Other 0
Operating Income
95 105 89
Other income

Asset sales

Interest, etc.
6 5 4
Pretax income

108 115 95
Income tax

Net Income
88 91 71


1. CGS=Vessel operating costs + Costs of other marine revenues

Revenue was 1.3 percent below our estimate. We expected Revenue to be 14.4 percent greater than in the year-earlier quarter, and the actual increase was 13.0 percent. In addition, we thought the Cost of Goods Sold (CGS) would be 46 percent of Revenue, and the actual value was a heftier 49 percent. Depreciation expenses were 9.2 percent of Revenue, a little less than our 11 percent estimate. Sales, General, and Administrative (SG&A) expenses were 10.5 percent of Revenue, compared to our forecast of 9 percent.

The net effect of the lower Revenue, higher CGS, lower depreciation, and higher SG&A expenses was Operating Income 9.5 percent below the forecast value.

The gap was partially closed on below-the-line items. Non-operating income was $3 million greater than expected. Equally significant, the effective Income Tax Rate was 19.4 percent, instead of the predicted 21 percent. As a result, Net Income fell short of our prediction by only 3.3 percent.

Non-recurring, after-tax charges of $3.5 million ($0.06/share) are included in these results. These charges might explain some part of the higher-than-expected CGS or SG&A expenses.

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